9th Symposium on
Finance, Banking, and Insurance
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Axel F. A.
Adam-Müller |
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University of
Konstanz, Germany |
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This paper
analyzes optimal hedging of a tradable risk (e.g. price
risk or exchange rate risk) with forward contracts in the
presence of untradable inflation risk. Utility is defined
over real wealth. Optimal forward positions are derived
relative to a given initial exposure in the tradable
risk. A nominally unbiased forward market usually implies
a non-zero real risk premium and hence some risk taking.
If untradable inflation risk is a monotone function of
the tradable risk plus noise, cross hedging and
speculating on the real risk premium are conflicting
objectives; the level of relative risk aversion
determines which objective is dominant in a nominally
unbiased forward market. |
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